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Events

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Back-to-school sales tax holidays are popular with consumers, but cash-strapped states
often find them hard to justify.

“Politically, it is a very appealing thing to sell to constituents. But I reviewed
a lot of literature, and what generally happens is there really isn’t much of an impact,”
Allen Lynch, associate professor of economics and quantitative methods at Mercer University,
told Bloomberg BNA.

The tax holidays are designed to bring relief to consumers for two to three days a
year, usually in late July to mid-August, on clothes and other items students may
need for the new school year. At a peak in 2010, 19 states offered the tax-free days.
The number is 16 this year.

Lawmakers in Georgia, which is surrounded by states with back-to-school sales tax
holidays, opted against continuing it this year over protests of retail and some business
groups. The state doesn’t expect a budget gap this year or next, but rising pension
costs are a concern.

The holiday cost state and local governments in Georgia as much as $70 million each
year, according to Wesley Tharpe, Georgia Budget & Policy Institute’s research director.

“That adds up to real money at a time when Georgia’s state and local lawmakers are
struggling to fully fund schools, meet transportation demand and keep rural hospitals
from shuttering,” Tharpe
wrote in a 2015 post. “Redirecting the funds Georgia loses through its sales tax holidays
to these and other public investments could provide real benefit to Georgia families
and a real boost to the state’s economy.”

Dropping the Holiday

Holidays in Illinois, New York, North Carolina, West Virginia, and Vermont were either
short-lived or repealed, according to a July 12
report by the Institute on Taxation and Economic Policy (ITEP). Lawmakers in Indiana, Kansas,
Maine, Nebraska, Rhode Island, Washington, and Wisconsin recently rejected new back-to-school
holidays.

Many states repeal or suspend the holidays when facing budget difficulties, tax groups
say. Thirty-three states face revenue shortfalls in fiscal years 2017 and 2018, according
to the
Center on Budget and Policy Priorities.

Legislators in Massachusetts, bordered by pro-holiday Connecticut and sales-tax-free
New Hampshire, also voted against tax-free days. Though the state has a statutory
sales tax exemption for clothes priced at $175 or less, the state revenue department
estimated that the 2015 holiday cost $25.5 million in lost tax revenue.

‘Wise to Follow’

The District of Columbia Office of Taxation and Revenue estimated $640,000 in tax
revenue savings by canceling its sales tax holiday in 2009, according to a July 25
report from the Tax Foundation. After eight years of such holidays, tax officials “found
the holiday did not spur enough economic growth to offset the costs.”

The Tax Foundation also reported that North Carolina officials found that repealing
their sales tax holiday in 2013 would save $16.3 million the following year. The state
funneled those dollars toward individual and corporate income tax cuts.

“Other states would be wise to follow D.C.’s and North Carolina’s lead and reevaluate
the costs and benefits of sales tax holidays,” the report said.

Consumers, Retailers Favor

However, Todd Pack, a spokesperson for the National Federation of Independent Business,
told Bloomberg BNA that his group’s retail members generally like state sales tax
holidays for the business that those events tend to generate.

“It does get people shopping,” Pack said. “There is a lot of buzz around these sales
tax holidays.”

The NFIB encourages people to use such events not only to shop at large retail chain
stores, but also to support their local small businesses, he added.

Some also argue that the money saved by consumers can be meaningful to individual
families. According to the National Retail Federation, a retail trade association
based in Washington, D.C., consumers can save about 5 percent to 10 percent during
sales tax holidays, depending on the state.

Tax Groups Oppose

Finding sales tax holidays an “ineffective alternative to real sales tax reform,”
the liberal-leaning ITEP reported that a two- or three-day sales tax holiday does
nothing to reduce taxes for low- and middle-income taxpayers “during the other 362
days of the year.”

Wealthier taxpayer are better positioned to benefit, because they have more flexibility
in timing their purchases to take advantage of a tax holiday—"an option that isn’t
available to families living paycheck to paycheck,” ITEP said.

The Tax Foundation concurred, saying in its report that in order to give a small amount
of tax savings to those with lower incomes, sales tax holidays give a large amount
of savings to higher-income groups.

‘Political Gimmicks’

Lawmakers are implicitly acknowledging with sales tax holidays that their state’s
tax system isn’t competitive, and they should instead reduce the year-round sales
tax rate, according to the Tax Foundation.

In fact, said Lynch, at Mercer University, most retailers raise prices for the sales
tax weekend, so shoppers aren’t really missing much without a holiday.

“It’s very appealing to consumers to hear that they’re going to get this tax break,”
he said.

“Consumers are generally very rational, but consumers find this notion of a tax break
to be psychologically very appealing,” Lynch added. “And consumers really don’t take
the time to really study how prices change.”

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